Inflation Targeting Under Potential Output Uncertainty
October 1, 2000
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Summary
To achieve their price stability objectives, many monetary authorities use the gap between current and potential output as an indicator of future price pressures. This policy-setting strategy has been criticized because potential output estimates have a high degree of uncertainty. In this paper, estimates of potential output uncertainty in New Zealand are used to examine the output gap’s usefulness. The results suggest that although output gap uncertainty leads to more inflation and output variability, policy based directly and/or indirectly on the output gap leads to better macroeconomic stability than policy based only on observable inflation and output growth.
Subject: Business cycles, Economic growth, Inflation, Inflation targeting, Monetary policy, Output gap, Potential output, Prices, Production
Keywords: Business cycles, Inflation, Inflation targeting, Monetary policy rules, Output gap, output gap coefficient, output gap error, output gap estimation error, output gap uncertainty, output-gap error process, potential output, UCM output gaps, uncertainty, WP
Pages:
29
Volume:
2000
DOI:
Issue:
158
Series:
Working Paper No. 2000/158
Stock No:
WPIEA1582000
ISBN:
9781451857573
ISSN:
1018-5941
